Calmer Waters…. Many Central Banks Holding Policy Reviews

February 7, 2018

U.S. stocks rose in the first hour of trading following Tuesday’s extreme whipsaws. In Europe, equities show gains so far of 2.3% in Italy and between 1% and 2% in the U.K., France, Germany, Switzerland, Greece, and Spain. Japan’s Nikkei only rebounded 0.2%, and further evidence that things are not fully back to normal markets fell in South Korea, China, Hong Kong and Singapore by another 2.3%, 1.8%, 1.4%, and 0.7%.

The 10-year Treasury yield did not stay north of 1.80% and is down 2 basis points on balance. But its German and British counterparts rose 3 and 1 basis points, and the Japanese JGB yield stayed level.

There’s been a big drop of more than 2.0% in the price of copper, and WTI oil and gold slid 0.5% and 0.4%.

The dollar is up mostly, with gains so far of 0.8% against the Swiss franc, 0.6% relative to sterling, 0.3% vis-a-vis the Aussie dollar, and 0.1% each against the yen and loonie. The yuan is unchanged, and the Mexican peso is marginally firmer.

Officials at the National Bank of Romania followed up last month’s 25-basis point rate hike with another of similar size. The monetary policy rate, which had been cut from 3.5% in August 2014 to 1.75% by May 2015 and kept there until the January hike, is now at 2.25%. Overnight deposit and lending rates were also increased by 25 basis points today, as officials expect inflation to climb further in the near term on supply-side forces.

The Reserve Bank of India’s repo rate was kept at 6.0% by a 5-1 vote of policymakers. Since 2015, such had been reduced by a total of two percentage points, most recently by 25 basis points last August. Inflation in India now lies above the 4% medium-term target center. While officials expect price pressures to start subsiding in the final quarter, they concede that price risk is skewed to the upside and plan to monitor the situation closely.

Iceland’s central bank also left its policy stance unchanged. The seven-day term deposit rate has been at 4.25% since a 25 basis point cut in October 2017 that capped 125 basis points of easing dating back to August 2016 and which reversed 125 bps of rate hikes in 2015. Inflation’s rose to 2.4% last month but is projected to hover near target.

Central banks in Brazil and Poland are also holding policy reviews today, and ones in the U.K., the Philippines, Thailand, Serbia, New Zealand and Peru are on tap for Thursday.

German industrial production, which had jumped 3.1% in November, slipped 0.6% in December but still managed a strong 6.5% December-over-December advance. Output posted successive quarterly increases last year of 1.3% in 1Q, 1.9% in 2Q, 1.1% in 3Q and 0.7% in the final quarter.

In Hungary, Norway, and Denmark, industrial production respectively climbed 4.5%, rose 0.3% and fell by 3.2% between December 2016 and the end of 2017.

Like other British housing market indicators, the Halifax price index continued to show slackening pressure in January when such posted an on-year rise of 2.2%, down from 2.7% in the year to December and 4.5% as recently as October.

Italian retail sales fell 0.1% on month and 0.3% on year in December.

France recorded a smaller EUR 0.9 billion current account gap in December. But the full-2017 trade deficit of EUR 62.3 billion was 29% greater than the 2016 deficit and the largest imbalance since 2012.

New Zealand quarterly labor market data revealed a downtick of unemployment to 4.5%, lowest since the final quarter of 2008, and a 0.4% fourth quarter-over-fourth quarter increase in private sector labor costs. The labor participation rate edged down to 71.0% from 71.2%.

Japanese labor cash earnings rose 0.7% on year in December but fell 0.5% on an inflation-adjusted basis. Japan needs accelerating wage pressure to secure the central bank’s 2% inflation goal in the medium term. So far that’s proven elusive. Japanese international reserves (mostly currency holdings) went up $4.25 billion last month to $1.268 trillion and were $37 billion higher than in January 2017. Yet a third data release today showed a slight dip in the index of leading economic indicators to a 2-month low, but that was accompanied by a sharp further advance of the index of coincident economic indicators to a new high for the move.

The IBD/TIPP index of U.S. investor confidence rose 1.6 points in February to a 13-year high. U.S. mortgage applications rose 0.7% last week after dropping 2.6% in the final full week of January.

Canadian building permits leaped 4.8% on month and 11.5% on year in December.

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